CAPEX - these are the means of the company that it uses to purchase the basic equipment that is used in the production process or to improve the technical aspects of the enterprise. In addition, the purchase of new buildings also falls under this definition, because they can also be used to profit from an enterprise. We will discuss the importance of capital expenditures, their types and calculations in our article.
Definition and interpretation of the concept
So, CAPEX is a company’s capital expenditures aimed at modernizing existing assets (real estate, machinery, equipment) or acquiring new ones. Here are some examples that can be attributed to this concept:
- design and creation of a new website for the company;
- replacement or improvement of old equipment;
- construction of a new factory or office building;
Moreover, CAPEX includes all associated costs that will fall into the above categories: salaries for programmers and designers, purchase of building materials, purchase of new computers in the office, and so on.
What is OPEX?
Let's try to explain what CAPEX and OPEX are, in simple words. At the expense of the first concept, we have more or less understood, although we will certainly return to this issue in the following sections. But under the "nut" refers to fixed costs that the company is forced to allocate to support the business. This category includes:
- payment of various licenses (if necessary);
- salaries to employees;
- payment for website hosting.
Thus, OPEX can be observed at every enterprise that operates, and CAPEX - only at those that strive for continuous development. Of course, if the owner of the company will constantly pay wages to his employees and acquire all the necessary licenses, this will also lead to the development of the enterprise, but more slowly.
Why is CAPEX calculated?
Thinking about what the CAPEX formula looks like? Then, for starters, you should familiarize yourself with why people generally calculate this indicator. As a rule, the majority of large companies try to reduce the rate of constant waste and spend the saved money on the development of the enterprise. Quite often, the success of a company depends on a properly formed monetary policy. However, one cannot rely on intuition alone - calculations are needed.
For example, the owner of the company can reduce the number of workers, thereby reducing wage costs, after which, with the money saved, purchase first-class equipment that will replace two or three workers. Such actions will help not only reduce monthly expenses, but also develop the enterprise, since quite often equipment works much more productively than a person and produces a finished product much faster.
CAPEX Capital Costs
The translation of the English word CAPEX consists of two words capital and expense - capital expenditures. That is, the abbreviation consists of the first two or three letters of foreign words. Capital expenditures can also be called fixed assets of the company, which it uses for development. This includes:
- retraining costs for employees;
- acquisition of a new vehicle;
- hiring specialists.
In general, all expenses that directly or indirectly affect the development of the company. Also, capital expenditures include loans to other legal entities and the provision of loans, since the money will still be returned after a certain period, and even with interest.
What are the operating costs?
OPEX (Operating Expenses) is the company's operating expenses aimed at maintaining a business. Also, some entrepreneurs call such expenses the cost of doing business, which is absolutely true. The most common type of nuts is employee salaries. These costs must be recorded in the documents of the company.
Also, do not forget about the constant need to spend a certain part of the money on advertising, which helps not only maintain the business at a certain level, but also develop it. Then why not classify the data as expenses in CAPEX? This is because payments to the advertising agency are made all the time - and this is the determining factor in belonging to a particular concept.
Acquisition of fixed assets
Initially, in any company there are no funds that allow you to produce products or services for sale. It is at the first stage of development that the main costs of CAPEX occur. This may mean the construction or purchase of a building, the acquisition of all necessary equipment, the expansion of the initial material base of the enterprise, and so on.
Is an investment in fixed assets of an enterprise on the part of a shareholder or a legal company considered a capital investment? Of course, since this allows you to develop the company and get a certain profit from the money invested. The size of the CAPEX investment program depends on company policy. For example, many corporations sell securities, after which they pay investors profit on dividends (shares) or coupons (bonds).
The importance of ongoing contributions to the OS
According to an online review, CAPEX needs constant funding, otherwise the company simply will not develop and at best will stand in one place, and in the worst, it will begin to give way to competing companies. Therefore, the main asset must be constantly functioning and replenished. To do this, you can attract outside investors or invest your own funds received from the sale of goods and services of the company. Here is just a basic list of costs that CAPEX may include:
- design and survey work;
- technical re-equipment;
- equipment testing;
- equipment modernization;
- repair of equipment.
Funds for all these actions should be allocated from the main asset and constantly supplemented, since the development of the company depends on it. The most competent and enterprising entrepreneurs understand when it is best to invest in the development of a function, when it is best to transfer money from OPEX to CAPEX and how to manage a company so that there is always money for development in its budget.
Calculation formula
Now you understand that CAPEX is a very important point for the development of any enterprise. However, it is worthwhile to understand that in most cases the formula for calculating it is strictly individual, since some companies need more capital assets, while others need operating ones. However, there is still a certain formula that is considered universal and fits most companies. Follow the algorithm below to calculate CAPEX.
- We calculate the company's profit for the month.
- Subtract from it all consumables for this period.
- Subtract 85% from the resulting number.
- The remaining amount is sent to the development of the company.
Most specialists are sure that 15% of net profit is more than enough to develop the enterprise. The figure may seem initially small, but it will increase every month (as the company develops). In a few years, these 15% will not amount to 30-40 thousand rubles, but several million.
What is capital cost?
CAPEX is not only the funds spent on the development of the company. This also includes capital expenditures - funds that do not directly lead to the development of the enterprise, but accompany this. Here is a short list of examples:
- professional advice from specialists;
- business management training costs;
- labor remuneration to employees.
All these points do not directly affect the development of the enterprise, but all the same, sooner or later they lead to development. If you pay cash bonuses to employees, they will be motivated to do a good job. The cost of consulting with a lawyer will pay off when you decide to draw up a cooperation agreement with another company. On the other hand, with the costs of various trainings it is still more understandable - the more you know about your field of activity, the better you will be able to manage the company and its resources.
Nuances to invest in CAPEX
A novice entrepreneur should learn to understand when it is possible to invest company resources in the development of an enterprise, and when it is best to refrain from it. For example, if, due to investments in CAPEX, you will not be able to repay any of the monthly expenses, then it is best to refrain from such actions. The following factors are also recommended:
- current parameters of the enterprise - in some cases, the development may not be appropriate, because it will not be fully implemented (for example, the staff does not have enough employees who could work on new equipment);
- specific parameters of the current asset - an asset that is not always available allows you to start developing an existing enterprise, therefore, development stops until new resources are found (for example, the floor space does not allow you to purchase equipment, as a result of which you will have to wait for the opening of a new store or factory) ;
- monetary value - the amount of finance that can be used to promote a business without prejudice to an existing company.
If you take into account all of the above indicators, then investing in the development of the company will bring huge profits. Therefore, learn to evaluate your capabilities and the time when CAPEX will be most profitable.
Video and conclusion
We hope our article helped you understand what CAPEX is. In simple words, we tried to bring this information to the reader. If you have any questions about this or you just want to know a little more about this topic, we recommend that you watch a short video in which an experienced entrepreneur talks about what is the breakeven point and how to calculate it correctly so that the enterprise always had the means to develop.
As you can see, CAPEX is an essential part of the development of any business, because without constant allocation of funds for capital expenditures, your profit will remain at the level at which it is now. If every month you allocate at least 15% of net profit to the development of the enterprise, then in a few years your company will begin to make a profit several times more than it is now. We wish you good luck in all your endeavors.